Serbia's central bank keeps benchmark rate at 3.5 pct

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By Ivana Sekularac

BELGRADE, Dec 7 (Reuters) - Serbia's central bank held its benchmark interest rate at 3.5 percent on Thursday, erring on the side of caution ahead of a U.S. Federal Reserve meeting next week and taking into account the weakening of the dinar currency.

Ten of 13 analysts and traders polled by Reuters this week and last had said the central bank would leave the rate unchanged. Three had forecast a 25 basis-point cut.

"Uncertainty on international financial markets is present," the bank said, citing "divergence of monetary policies of the U.S. Fed and the European central bank which could influence capital flows to emerging countries."

The bank, which cut rates in September and October to spur growth, next meets on Jan. 11.

October inflation stood at 2.8 percent, within the central bank's target range of 3 percent, plus or minus 1.5 percent. But the weakening of the dinar and next year's planned rise in public sector wages and pensions could push inflation up more.

In the past two weeks, the dinar has lost 0.6 percent, prompting the central bank to sell more than 110 million euros in the interbank market. November inflation will be published on Dec. 12.

The banks also sold euros on Thursday, minutes before it announced its rate decision.

The U.S. Federal Reserves could announce a rate hike next week, which would tend to draw investors away from emerging markets such as Serbia.

Serbian economic growth has been sluggish, due in part to a fall in electricity output in winter and a poor harvest after months of drought.

The IMF cut its estimate for country's 2017 growth to 2 percent from 2.3 percent this week but affirmed its 2018 forecast at 3.5 percent.

The draft budget for 2018 passed by the government last week includes forecasts for the economy to grow 3.5 percent next year.

After Thursday's rate decision the dinar traded at 119.50 to euro, 0.1 percent stronger than the previous close.

This article appears in: Fundamental Analysis , Stocks , World Markets , Economy

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